Wrong way! Stocks sold off on Friday, despite solid employment figures, in response to trade tensions brought on by Trump’s newest tariff threat. Employment numbers coming in largely as expected were not enough to divert attention away from a deteriorating trade situation with China.
MY TWO CENTS
- Stuff** is getting real now. As expected, China did not take kindly to Trump’s Thursday night tweet about levying a 10% tariff on an additional $300 billion in Chinese consumer goods. Also as expected, the markets did not either. WHILE YOU SLEPT, the Chinese Government asked its state owned enterprises to suspend purchases of US Agricultural products. OUCH! Additionally, the PBOC (Peoples Bank of China), who is responsible for fixing the daily currency exchange rate, abstained from backstopping a decline in the Yuan allowing it to weaken past 7.0 to levels not seen since 2008. The currency weakened in response to expectations that the new tariff will exact economic harm, which is a normal response. However the Government’s allowing the currency to weaken is not normal and serves two purposes: a) the weaker Yuan makes Chinese goods cheaper to importers and can serve as a stimulus and b) the US Dollar strengthens making US goods more expensive to its trading partners … and the Administration is quite vocal on its disdain for a strong Dollar, amongst many, many other things. OUCH!! Take a look at chart 14 in my attached daily chartbook to get a feel for the magnitude of the move. The rates markets are not taking the latest Trump threat lightly either. Ten-year treasury yields are around 1.75% this morning, down almost -9 basis points from last Friday’s close. Odds of further Fed Funds cuts have gone up as well. According to Fed Funds futures, there is now a 100% chance of another 25 to 50 basis point cut in September.
- What news from the Oracle of Omaha? Many analysts have been lamenting that stocks appear to be a bit overvalued given the slower growth of earnings, trade headwinds, mounting geopolitical risks, and a slowing economy. Investors have been sitting on the sidelines amassing cash, perhaps waiting for a real pullback to jump in. They are not alone. Berkshire Hathaway announced in its earnings report that it is holding $122 billion in cash and that its net stock transactions reflect that net sales were $1 billion more than in the prior quarter. Why is that important? Companies like Berkshire Hathaway, although they theoretically only have access to the same information available to any other investor who wishes to dig it up, have piles of bright analysts and shiny models to assess stock valuations which are credited for the long and successful track record. When companies of that ilk are sitting on the sidelines, every day investors should take note.
THE MARKETS
Stocks sold off for a second day as trade tensions continued to spook traders. This despite a relatively strong employment number which largely came in right on expectations. The S&P500 fell by -0.73%, the Dow Jones Industrial Average slipped by -0.37%, the Russell 2000 sold off by -1.10%, and the NASDAQ 100 dropped by -1.39%. Bonds jumped as funds clamored for safe havens and weakening economic expectations brought 10-year treasury yields down by -5 basis points to 1.84%.
WHAT’S NXT
- Markit Services PMI and ISM Non-manufacturing Index are expected to come in at 52.2 and 55.5 respectively, compared to prior readings of 52.2 and 55.1.
- Fed Governor Lael Brainerd will speak today.
- Tyson Foods announced earnings earlier this morning and beat expectations by +22.0%. After the bell we will hear from Shake Shack, Marriott International, and Tenet Healthcare, amongst others.
- The week ahead will be a lighter week for both economic numbers and earnings compared to last week’s blitz. We wil get the JOLTS job openings as well as Producer Price index (PPI) for July, in addition to today's services indices. Please refer to the attached earnings and economic calendars for details.